Volcker (51 page)

12
. Oskar Morgenstern,
The Limits of Economics
(London: William Hodge and Company, 1937), p. 4.

13
. Ibid., p. 14.

14
. Oskar Morgenstern,
On the Accuracy of Economic Observations
(Princeton, NJ: Princeton University Press, 2nd ed., 1963), p. 190

15
. PIPAV.

16
. Friedrich A. Hayek,
The Road to Serfdom
(Chicago: The University of Chicago Press, 1944), reprinted 1976.

17
. PIPAV.

18
. Ibid.

19
. Ibid.

20
. Ibid.

21
. Ibid.

22
. Ibid.

23
. Robert Roosa,
Federal Reserve Operations in the Money and Government Securities Markets
(New York: Federal Reserve Bank of New York, July 1956). The author's first footnote on page 7 reads, “Messrs. Tilford C. Gaines and Paul A. Volcker must be singled out, however, because of their valiant help in steering the original draft of this booklet through the final stages of editing, checking, and printing.”

24
.
New York Times
, December 25, 1993, p. A37.

25
.
Bid
means the dealer is ready to buy, and
offer
means the dealer is ready to sell. The 9 is short for the bid price of, say, 100 9/32, and the 10 is short for
100 10/32. The phrase “100 by 100” refers to the size of the transaction: 100 bonds with a face value of $1,000 each.

26
. See the discussion in Robert P. Bremner,
Chairman of the Fed: William McChesney Martin Jr. and the Creation of the Modern American Financial System
(New Haven, CT: Yale University Press, 2004), p. 161.

27
. Ibid., p. 271.

28
. PIPAV.

29
. Ibid.

30
. Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
(New York: Times Books, 1992), p. 5.

31
. See Robert V. Roosa,
The Dollar and World Liquidity
(New York: Random House, 1967), p. 1. According to Arthur Schlesinger,
A Thousand Days: John F. Kennedy in the White House
(Boston: Houghton Mifflin Company, 1965), p. 654, Kennedy “used to tell his advisers that the two things which scared him most were nuclear war and the payments deficit.”

32
. Schlesinger,
A Thousand Days
, p. 154.

33
.
New York Times
, October 31, 1960, p. 1.

34
.
New York Times
, November 2, 1960, p. 25.

35
. Volcker and Gyohten,
Changing Fortunes
, p. 4.

36
.
New York Times
, July 2, 1944, p. 14.

37
. Ibid.

38
.
New York Times
, July 2, 1944, p. 14.

39
. A detailed list of the participants appears in the
Christian Science Monitor
, July 1, 1944, p. 1.

40
.
Washington Post
, July 28, 1944, p. 1.

41
. White had earned a Ph.D. from Harvard and had been brought to the Treasury by University of Chicago economist Jacob Viner, a leading authority on international trade and finance, who had been on special assignment at the Treasury. See James Boughton, “Harry Dexter White and the International Monetary Fund,”
Finance and Development
35, no. 3 (September 1998).

42
.
New York Times
, July 6, 1944, p. 1 continued.

43
. See Charles Kindleberger, “Competitive Currency Depreciation Between Denmark and New Zealand,”
Harvard Business Review
12, no. 4 (July 1934), pp. 416–26; and Sebastian Mallaby,
Wall Street Journal
, Saturday/Sunday, October 25–26, 2008, p. W3.

44
.
New York Times
, November 29, 1964, p. F1.

45
.
New York Times
, March 22, 1954, p. 35.

46
. The twice-daily gold fixing did not begin until April 1968.

47
.
New York Times
, October 21, 1960, p. 1.

48
. Treasury charged eight and three-quarter cents for handling (see
Wall Street Journal
, September 23, 1960).

49
. Volcker and Gyohten,
Changing Fortunes
, p. 21. The date is listed there as October 30, 1960. It should be October 20.

50
. Ibid.

51
.
New York Times
, October 20, 1960, p. 51.

52
.
New York Times
, October 22, 1960, p. 22.

53
.
New York Times
, October 30, 1960, p. E10.

54
.
New York Times
, October 25, 1960, p. 1.

55
. Volcker and Gyohten,
Changing Fortunes
, p. 25.

56
. Schlesinger,
A Thousand Days
, p. 654.

57
. Ibid.

58
. PIPAV.

59
. The stock of gold rose from $20.0 billion in 1945 to $24.5 billion in 1949 and then declined back to $20.0 billion in 1958. See
Historical Statistics of the United States
, U.S. Bureau of the Census, Government Printing Office, Washington, D.C., 1975, p. 995. Speculators focused on deficits in America's balance of payments that began in 1958. Also see
Economic Report of the President
, Council of Economic Advisers, 1961, pp. 107–108.

60
. See
Wall Street Journal
, September 23, 1960, p. 3.

61
. Ibid.

62
. Ibid.

63
.
Wall Street Journal
, October 31, 1960, p. 2.

64
. Paul A. Samuelson and Robert M. Solow, “Analytical Aspects of Anti-Inflation Policy,”
American Economic Review
50, no. 2 (May 1960): 177–94.

65
. Schlesinger,
A Thousand Days
, p. 154.

66
. Ibid.

67
. PIPAV.

68
. Volcker's appointment appears in the
New York Times
, November 18, 1963, p. 22.

69
. PIPAV.

1
. This quote and those in the conversation that follows are based on the recollection of Paul Volcker.

2
. PIPAV.

3
. Friedrich A. Hayek,
The Road to Serfdom
, fiftieth anniversary edition (Chicago: University of Chicago Press, 1994), p. 227. The book was published originally in 1944 in the United Kingdom by George Routledge and Sons and in the United States by the University of Chicago Press.

4
. PIPAV.

5
. PIPAV. David Hume (1711–1776), a contemporary of Adam Smith, articulated the link between money and prices, known as the quantity theory of money, in “Of Interest,” in his
Essays, Moral, Political, and Literary
(1752). Also see Carl Wennerlind, “David Hume's Monetary Theory Revisited: Was He Really a Quantity Theorist and an Inflationist?”
Journal of Political Economy
113, no. 1 (February 2005): 223–37.

6
. PIPAV.

7
. Paul A. Volcker, “The Problems of Federal Reserve Policy Since World War II,” Thesis submitted to the Department of Economics, Princeton University, Princeton, NJ, Mimeograph, January 7, 1949, p. 77.

8
. Ibid. pp. 233 and 235.

9
. PIPAV.

10
. See Peter Bernstein,
The Power of Gold
(New York: John Wiley, 2000), pp. 32–37.

11
. A twenty-dollar Federal Reserve note could be exchanged for a double eagle, which consisted of .9675 ounces of pure gold.

12
. A gold bar weighs 400 ounces, or 25 pounds. A regulation bowling ball can weigh between 6 and 16 pounds—with 12 pounds a reasonable size for most adults.

13
. See William Silber, “Why Did FDR's Bank Holiday Succeed?”
Federal Reserve Bank of New York Economic Policy Review
15, no. 1 (July 2009), for a discussion of the Emergency Banking Act of 1933.

14
. See Executive Order 6102, dated April 5, 1933, available at
www.runto gold.com/images/EO6102.pdf
.

15
. See “Treasury Defied on Gold Hoarding,”
New York Times
, May 3, 1933, p. 1.

16
.
New York Times
, May 3, 1933, p. 16.

17
. The Gold Reserve Act of January 1934 legislated a number of regulations concerning gold: (1) Section 2 mandated that all gold coins be removed from circulation and required American citizens to turn in their gold coins in exchange for paper currency; (2) section 3 gave the secretary of the treasury the responsibility of controlling all dealings in gold; and (3) section 10 directed the secretary of the treasury to use gold bullion to settle international balances and to control the exchange value of the dollar.

18
. Pooh-Bah is a character in Gilbert and Sullivan's
The Mikado
. The mocking title Lord High Everything Else summarizes his puffed-up image.

19.
Since there are 480 grains per ounce of fine gold, the price per ounce was set at 480/13.714, equal to $35 per ounce.

20
. See Federal Reserve Report,
Wall Street Journal
, January 20, 1961, p. 17.

21
. The Federal Reserve held $17.2 billion in gold certificates (see ibid.), which represented 37.7 percent of the required cover against total Federal Reserve liabilities. In January 1961 the gold cover requirement was 25 percent, having been lowered from 40 percent in June 1945 (see
Wall Street Journal
, June 13, 1945, p. 3). The 25 percent minimum cover amounted to $11.4 billion in gold. Thus, only $6 billion in gold was available to meet foreign demand.

22
. Official claims of foreign central banks on the United States totaled $11.1 billion at the end of 1960 (see International Monetary Fund, Annual Report, Washington, DC, 1970, p. 18).

23
. Public law 93-373, which went into effect on December 31, 1974, made it legal to invest in gold in the United States.

24
. Letter dated November 4, 1965, Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 4, Folder 68 (Chronological File, 1965, 1).

25
. The following conversation is based on Volcker's recollection.

26
. According to Roosa (
The Dollar and World Liquidity
[New York: Random House, 1967], p. 23), “The Treasury, again acting through the Federal Reserve Bank of New York, … set in motion the informal ‘pool' through which seven other countries had initially joined with the United States on an ad hoc basis in November 1960 to help stabilize the London gold market.” Charles A. Coombs,
The Arena of International Finance
(New York: John Wiley, 1976), p. 63, mentions November 1961 as the formal beginning of the Gold Pool. Roosa (
The Dollar and World Liquidity
, p. 119) evaluated the continued operation of the pool two years later: “The operations in the London gold market, all conducted by the Bank of England, have been a model of informal cooperation, renewed through frequent consultation … The speculative fever has largely been removed from transactions in gold.”

27
. Timothy Naftali, ed.,
John F. Kennedy: The Great Crises
, vol. I (New York: W. W. Norton, 2001), pp. 464 and 492.

28
. Ibid., p. 495.

29
. Ibid., p. 496.

30
. Roosa,
The Dollar and World Liquidity
, p. 44.

31
. Naftali,
John F. Kennedy
, p. 496.

32
. See
Reduction in Reserve Ratio for Federal Reserve Notes and Deposits: Hearing Before Senate Committee on Banking and Currency
, 79th Congress, 1st Sess., February 20, 1945, pp. 3–54. The bill was signed into law by President Truman on June 12, 1945 (see
Wall Street Journal
, June 13, 1945, p. 3).

33.
Volcker's memorandum, entitled “To Establish a Committee to Study the Gold Reserve Requirement,” dated February 8, 1962 (Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 11, Folder 179, Gold Cover Committee), was designed “to deflect criticism of changing the gold cover.” To avoid appearing to stack the deck, Volcker included two alternative names to Sproul as chairman: John J. McCloy, former chairman of the Chase Manhattan Bank, and Henry C. Alexander, former chairman of J.P. Morgan and Company.